Issues related with central government - Finance (part three)

2. Explain the following economic terms:

Recession: a term describing a rapid economic slowdown. Technically speaking, a recession is signaled by a period of two successive economic quarters during which the economy “shrinks” – that is, during which less money is being borrowed and spent by consumers, leading to lower sales and profits for businesses, the scaling back of production, and redundancies.

Public sector net cash requirement (PSNCR): formerly the “public sector borrowing requirement” (PSBR), this is the sum of money that the British government will need to borrow through commercial loans or from the public in a given financial year to meet its public spending commitments – that is, it is the difference between the total taxation that the Exchequer expects to raise in a year and its actual outgoings.

Consumer Prices Index (CPI): a few years ago, the Chancellor announced the Government now favoured a different way of reckoning inflation, the CPI, which does not include the costs of mortgages, and measures so-called “underlying inflation”. The CPI is the “official” measure of inflation.

Mortgages are not such a big factor in continental Europe where home-ownership is so prevalent as in the UK and Ireland, and far more people rent their homes. Purely coincidentally, this change was made just at a time when UK mortgage costs began to rise for the first time in many years.

Balance of Trade: the difference in value between imports to and exports from the UK in a given financial year, excluding financial transfers and debt payments to foreigners.

If Britain is importing consumer goods and services worth more than those it is exporting, it is in a “balance of trade deficit”; if the reverse is true, it is in a “balance of trade surplus”.

The UK is a net importer, that is, we import more goods than we export, which creates a balance of trade deficit. This deficit is, however, covered by the value of invisible exports, the services the UK sells abroad, such as banking and insurance.

The UK always shows a surplus on invisible exports, and it is frequently said that the country has shifted from being a manufacturing nation to relying on the service economy.

Indirect Taxes: often referred to as “hidden” or “stealth” taxes, these are embedded in the cost of items bough by individuals or companies.

Value-Added Tax (VAT) and exercise duties on tobacco and alcohol are examples of indirect taxes. Because they are charged at a flat rate on relevant items, they are seen as regressive – i.e. they do not take account of an individual or company’s ability to pay.

Progressive Taxes: broadly a tax based on the ability to pay, such as income tax. So the richer you are, the more you pay.